FS Credit Opportunities Corp. Q1 FY2025 earnings call

• Performance: FSCO achieved a 3.53% net return, paid $0.19 per share distribution funded by net investment income, and deployed $163M in private/public credit.
• Market Conditions: Economic data resilient, but risk markets pressured; Treasury yields declined; loan and high yield bond performance mixed; private credit volume down QoQ but up YoY.
• Investment Activity: Cautious view due to volatility; strong origination via sourcing network; 96% new investments in private, first lien senior secured; focused on lower and core middle market with average EBITDA $25M-$75M.
• Portfolio Construction: Targets strong cash flows, senior debt with structural protections; leverages size/scale; invests across private/public markets.

FSCO delivered a net return of 3.53% based on NAV, outperforming high yield bonds by 259 basis points and loans by 305 basis points. The Fund paid distributions of $0.19 per share in the first quarter, fully funded through net investment income. $163 million was deployed across private and public credit assets. Private credit investments represented 72% of the portfolio as of March 31st, with 96% of new investment activity in privately originating investments, all being first lien senior secured loans. Senior secured debt made up 84% of the portfolio, unsecured debt 3%, asset-based finance 3%, and equity and other investments 10%. The annualized distribution yield was 10.5% (NAV) and 10.8% (market price) as of May 16th, 2025.

Continue active management and disciplined fundamental credit underwriting; evaluate new investments for tariff/geopolitical risks; believe in differentiated value proposition; goal to dynamically allocate capital to attractive opportunities across credit and business cycles.

• Market volatility, trade tensions, inflation, and Fed rate cuts pose risks.
• Second and third order effects of tariffs uncertain and may take time to materialize.

Q: What were some of the key drivers of the Fund's performance this quarter?

A: Investment income was strong. We had some accretive exits during Q1. And then we also had some appreciation of certain investments, including our Lifescan Global and our Correct Care Solutions investments, two names that were previously on non-accrual, but performed very well during the quarter.

Q: With the recent volatility in the market, have you seen any dislocations or unique opportunities to deploy capital into?

A: While spreads have retraced a large part of the February-April widening. We were able to take advantage of some investment opportunities during the tumultuous times. We deployed capital into some secondary market purchases at attractive yields. We were particularly focused on senior secured investments during that time period and even kind of super senior investments during that time period that had sold off. We also selectively participated in some new issues that had more favorable covenants than what was coming out in the market before the dislocation and additional spread. And then lastly, there were some private transactions that we were able to get some kind of attractive terms on likely because of the market turmoil. So terms that were likely wider than where they would have been and we not had that dislocation.

Q: Are you making any deliberate shifts in sector allocation or the capital structure due to macro risks brought on by the recent tariffs?

A: So we've assessed our portfolio and reviewed each investment line by line and considered the effects of the tariff. We definitely remain focused on higher quality first lien exposure. So just trying to stay top of the cap structure, lower kind of LTV to kind of deal with like uncertain times. We continue to really value covenants as well in uncertain times. And we are monitoring the geopolitical situation, tariffs, but also DOGE and other things to constantly kind of retool the types of investments kind of we're looking at and think about portfolio exposure and how to manage that.

Q: Can you provide an update on your leverage ratio and how much capacity remains below your target?

A: Yes. Regulatory leverage remains conservative at 0.48 times debt to equity as of the end of the quarter. It's about half a turn of leverage, which is below our historical leverage range of 0.5 times to 0.6 times. And just given the volatility in the market, we're happy to have a little bit of extra dry powder available to us to optimize and we invested dislocations.

Q: And how are you managing liquidity, especially in terms of undrawn commitments and cash reserves?

A: Yes, we think liquidity management is a strength. We don't need to sell assets to meet any obligations. At the end of the first quarter, we had $266 million available, whether including undrawn credit lines, cash reserves. So we're in a good position to act quickly on dislocations and attractive investment opportunities.

Q: You increased the distribution in January. Are you comfortable maintaining this distribution level going forward?

A: We are and we remain committed to providing consistent distributions. Net investment income is in line with our expectations and we have spillover income well over $100 million at the end of the quarter. So we have that buffer. Obviously, we are monitoring performance closely, but we continue to add investments with attractive yields to the portfolio to build projected investment to kind of look at.

Q: And how does your pipeline look heading into Q2? Are you seeing competition easing or intensifying the deal flow?

A: Deal flow has picked up recently. It was picking up at the end of the first quarter then right in the beginning of April and everything sort of slowed down a little bit. But our pipeline is really, really strong. I think you saw us execute on attractive investments in the first quarter. We've done some more stuff in the second quarter that's been also very attractive. We think we're well positioned competitively. Business just doing nicely at the moment and these and your competitors I think we have a lot of tools at our disposal that allow us to find things that are off market in attractive ways.

Q: And Andrew any updates on addressing preferred shares maturing in November 2025?

A: We started to engage with banks to address those upcoming maturities. The pricing for new press appears to be attractive. Spreads are likely tighter than those in the preferreds that are maturing. But given base rates, the total cost is likely to be higher than the 4.25% that we have right now.

Q: And our final question, what does spreads currently look like in the private and public markets adjusted for recent volatility in the market?

A: In the public markets, we're currently seeing spreads of 375 basis points to 400 basis points and that's probably 25 basis points to 50 basis points wider than the types early this year. In the private markets, we're currently seeing spreads in the 475 basis point to 550 basis point range for sponsor-based credit. And for non-sponsor based credit, we're currently seeing spreads in the 550 plus basis point range. What I will say is those are levels for kind of the broader market, but our Fund typically focuses more on the core middle market. So the large part of the private credit market might be doing deals today at the 475 level, maybe even the 450 level and we're generally not participating in that part of the market. We are generally playing in the 500 plus part of the market. Our recent product deals we have closed are currently 600 basis points plus. So we closed a first lien to a software business that provides software for planes in the S700 range. We provided a very opportunistic financing to an AI focused data center business that was in the mid-teens. And then we also closed on a loan in the packaging space to a non-sponsor at that S600 just to give you a flavor of some recent transactions.